Conrad Zurini | Broker of Record | Manager | conrad@rmxemail.com | 905-719-3033
Growing up in a disciplined Italian household, secrets were kept to the biter end. You see my parents did not really care which one of us broke something or attempted to murder the other, we would all somehow get disciplined, my sisters were at fault for not looking after me and I was blamed for provoking them. I remember one time we broke this vase which always sat on the lower mantel of our fireplace. It was an ugly black, white and orange glazed pottery piece, which looked like someone made it in their garage. One day my sisters and I were all arguing on what to watch on tv, which when I think about it now we only had 13 channels and 6 of which were Canadian programming so what choice did we really have? Once we decided what to watch, the next decision was who was going to get up and change the channel (also known as ‘turn’ the channel because it was a dial on the the actual tv, no remote). I believe I wasn’t moving fast enough so, being the youngest kid who didn’t warrant a seat on the couch, I sat on the floor beside the fireplace.
As a result of many threats on my physical being by my sisters if I didn’t get up and turn the channel, my sister decided to throw a pillow off of the couch at me, I ducked and the pillow squarely hit the vase. It was rather tall and it wobbled around what seemed like forever and finally fell against the brick and onto the hard surface of the lower mantle and broke into 3 pieces. We were all mortified and knew that we would all be getting the blame no matter who caused the damage. That’s the way it worked in our home, my dad called it democratic punishment, it was his way of keeping us all in line.
We commiserated over the broken vase for at least an hour until my sister Mari came up with the idea to glue it back together (something she had seen on The Brady Bunch). Obviously, it did not take my mom that much time to notice our handy work, (a remarkable job of reassembly, for a 5, 7 and 9 year old), so she innocently went to my dad to tell him about the broken vase, and how we glued it back near perfectly together. As a surprise to my mom and to us later in life, my dad shrugged it off and said how creative we were, but more importantly we operated as a team. It was our family’s worst kept secret.
The Bank of Canada’s Worst Kept Secret - The June Rate Drop
The Governor of the Bank of Canada recently at a press conference following the latest rate pause, announced that an interest rate drop was ‘within the realm of possibilities’. We have seen some great month-over- month inflation numbers (slightly up in March) which are well within the BOC target. The US on the other hand has had their inflation rate remain considerably more sticky. So when will the BOC depart from US monetary policy and go it alone (which will cause our dollar to lose value as investors move from lower interest Canada to higher Interest US)? All indicators point to June, as an ideal time when people begin their summer holidays and as many mortgages are set to renew at this time it would also lead to some relieving of mortgage rate stress for Canadians with variable mortgages.
A Lower Loonie Ain’t So Bad in the Summer Months - Another Reason for a June Rate Drop
Our reliance on foreign produce in the summer months, purchased in US dollars, is lessened as we gravitate to more local fare thus not pushing up inflation as our dollar drops compared to the US dollar. Also a lower Canadian dollar can make our exports more attractive and fuel our GDP. A lower loonie will attract foreign travelers and give a boost to our tourism this summer too. Canada will need to reduce rates to prop up our faltering economy and the drop in value of our dollar may barely be noticed by the time the Fed rolls back rates in September. As a result of the fed cutting rates we will see our dollar rebound just in time to buy tomatoes from California in the fall.
An Election in the Fall of 2024? - The Last Reason for a Rate Cut in June
There has always been a theory that the easing of monetary policy usually comes prior to an election. I can say with certainty that there is going to be an election south of our border on Tuesday, November 5th, 2024 (unless one candidate breaks a hip or the other is behind bars). But by my estimation Canadians are not scheduled to cast their vote in a federal election until October 2025. So rates coming down now would be pre-mature by election standards, or are they? There was a recent poll conducted by Nanos Research which found 46% of respondents wanted an election as soon as possible, with only 33% saying they would wait the full 4 years.
Why Did The Government of Canada Deliver a Santa Clause Budget For Millennials.
When have you ever experienced a high profile, dishing out money budget like we just had? Normally a Santa Claus Budget so to speak is prior to an election. By my calculation, this election style budget is 18 months too soon, so why now? Could something be happening behind the scenes to the coalition agreement between the Liberals and the NDP? This is a wild card speculation on my part but this recent budget which was focused on millennials which represent 25% of our population and an even larger voting block, coupled with a rate cut could mean leverage for the governing party and in turn an early election. Or are they just trying to win back some attention from those who seem to have tuned out the Liberal Leader as Mark Carney waits in the wings.
Using the Capital Gain Tax to Pay for Gifts
Back during the 2021 federal election there was speculation about potential changes to the capital gains tax. When governments begin to dial into reducing the deficit, the pot of tax gold is usually capital gains. There was speculation that our principal residences would not be exempt and the fact that we now have a spot on our income tax return where we must note the sale of our principal residence and claim the exemption made many of us think that the only way we as Canadians can build un-taxed wealth was in jeopardy. Instead, it came as no surprise to the accounting community that would brace themselves at every new budget, for a capital gains announcement. And sure enough the wealth re-distribution plank came through, which according to our finance minister only affects just over 1% of Canadians or 400,000 people.
June 25th - 6 Months Away From The Holiday Season
In an unprecedented move the Canadian government decided to give us
a short lead time before a tax increase but they chose the month of June maybe to soften it with good news around a rate cut. Usually when a tax
is introduced it would either be retroactive, immediate or commencing on January 1st. In this case they gave us until Tuesday June 25th, not the end of the month, not the beginning of the month, but on the 25th of a month which, for accounting purposes is very weird. I predict a flurry of amendments moving up the closing date of June 28th for the sale of investment properties, cottages and businesses. Why do you think they picked June 25th, exactly 6 months before Christmas? Why not July 1st Canada Day? It would have been very patriotic to celebrate all that is Canadian - beer, poutine and taxes!
The TSX Already Knows the Secret
Recently the US reported marginally higher inflation numbers along with lower than expected GDP growth numbers for the first quarter of the year. Both the US and Canadian stock markets dropped, with the Canadian market closing higher by end of the day that the US GDP numbers were reported. The US is feeling economic pressure, inflation is slightly higher and unemployment numbers point to a tighter job market conditions. However, if the growth trend continues to weaken what is the US Federal Reserve’s next move? Rate cuts dare I say? Tiff may now be able to sleep at night after he brings rates down in June knowing his US counterpart will have to start easing on monetary policy and follow Canada’s lead and begin to drop rates in September to fuel the US economy.
It’s Not A Matter of If......But When?
No matter how you look at all this economic data, many of our customers past, present and future are dialled-in to what is happening around mortgage rates and the overall economy. Without question, three quarters of 2022 and the whole of 2023 were historically down years for real estate unit sales. Those people who entered the market during that 21 month period of record high mortgage rates did so because they wanted and needed to. Now we are entering an era where rates will go the other way and confidence/demand in real estate will go back to within the 10 year average. Remember back in Q4 of 2023 there was talk of rates dropping as early as March of 2024 (the US Federal Reserve spoke of 3 rate drops in 2024). That information really moved the market in the early months of 2024 because people got off the sidelines and got into the market. When all that rate uphoria didn’t come to fruition those who chose to enter the market were too far into the process.
The consumer train had left the station and people began to look at properties again. They couldn’t unsee the value they were getting for their real estate dollar and they didn’t stop seeing the flaws in their existing homes or the need for more space. In other words, we as professionals in the market should have our ear to the proverbial ground, always do your homework, gage consumer confidence, interpret statistics and educate your tribes as to the trends that may be forming. Be in tune with the market around you and the overarching economic conditions which surround us. By doing so you will provide your clients with the knowledge and expertise which will allow them to make the best decision for themselves, their families and their businesses.
Why This Is Important
Despite the rates remember the fundamentals of real estate as a wealth builder
• According to CMHC home prices could reach peak levels of late 2021 and early 2022 by next year
• Demographic demand for housing is double housing starts.*
• Rental vacancy rates are 1.5% in Canada.*
• Rental rates increased by 8% in Canada in 2023.*
• Apartment style construction takes 32.6 months in Ontario, up from 29.5 months during same period last year.*
• Construction costs are up 80% from 2017, way outpacing construction.**
• The sell rate for those aged 75 to 79 is 21% and trending downward.*
*CMHC
**Globe and Mail, source Statistics Canada